For example, the Internal Revenue Service may mandate that a specific depreciation period be used for a fixed asset, while the internal accounting policies of a business dictate the use of a different number of periods. The resulting difference is a temporary one, in that the asset will eventually be fully depreciated for both tax and accounting purposes. During the periods when there is a temporary difference, there is said to be an interperiod tax allocation.

There are four types of transactions that can cause a temporary difference, which are:

Most businesses will have an ongoing series of temporary differences that will eventually be resolved, which means that there will always be some sort of interperiod tax allocation. The tax accountant should maintain records of the amounts of these reconciling items as part of the ongoing effort to construct tax returns.

There are different views on the amount of interperiod tax allocation to recognize. At one extreme, the amount of income tax expense recognized exactly matches the current amount of income tax, which means that there is no allocation. The opposite view is to allocate the tax effects of all temporary differences, with no consideration of the likelihood of their reversal. A midway view is to allocate only those differences that are likely to reverse in the near term.